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ABM Industries Acquires Diversco

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ABM Janitorial Services Inc, the wholly owned subsidiary of ABM Industries Inc. ([url=]ABM[/url]) completed the all-cash acquisition of South Carolina-based janitorial services company Diversco Inc. from DHI Holdings Inc. The acquisition will expand ABM Industries’ janitorial and security businesses within key regions across the country and among key client segments.

Diversco provides janitorial, security guard, yard and grounds, window washing, maintenance and repair services across the United States. In the fiscal year ended March 31, 2010, Diversco generated revenues of $79.3 million.

ABM Industries expects the Diversco operation to be integrated by the end of the year. Given Diversco’s strong manufacturing and industrial client base in the Southeast, Midwest and Mid-Atlantic regions of the United States, the acquisition offers ABM Industries a wider geographic reach. Diversco's business also complements its operations infrastructure and national presence.

ABM Industries is highly dependent on acquisitions for growth. However, the company has been relatively quiet on the acquisition front over the past two years. The last significant deal of OneSource was completed in 2007. The company made two small acquisitions in 2008 and 2009. The company had, however, indicated at its earnings call that it continues to look for acquisition opportunities to expand its customer base and enter new markets.

The company’s failure to make new acquisitions on a regular basis will hamper its growth rate. A slowdown in acquisition activity could not only lead to lower revenues, but also result in lower margins, as revenues associated with acquired operations generally have higher margins than new revenues through internal growth. We thus appreciate the company’s move to acquire Diversco.

ABM Industries’ top-line growth remains under pressure due to sagging commercial office building occupancy and rental rates in the U.S. The economic slowdown has resulted in lower commercial office building occupancy and rental rates, which in turn, has reduced demand and created pricing pressure for building maintenance and other services provided by ABM.

Further, ABM Industries expects unemployment insurance to be on the rise in the second half of fiscal 2010, offset by higher revenues. However, considering the economic scenario, ABM Industries’ earnings could be at a risk if demand and revenues do not improve and pressures from costs remain. Hence, we maintain our Underperform rating and Zacks #5 Rank (Strong Sell) on the stock.

San Francisco-based ABM Industries provides engineering, janitorial, parking and security services to thousands of commercial, industrial, institutional, and retail facilities across the United States as well as Puerto Rico, British Columbia and Canada.

The company’s operating segment, ABM Janitorial Services, provides a wide range of basic janitorial services for a variety of facilities: commercial office buildings, industrial buildings, retail stores, shopping centers, warehouses, airport terminals, health facilities and educational institutions, stadiums and arenas, and government buildings. The segment contributed 68% to ABM Industries’ 2009 revenues.

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